Invitation Homes Is The Catalyst Blackstone Needs
Investors in The Blackstone Group (BX) may be on the cusp of cashing in on a long-term multi-billion dollar opportunity. This week, Bloomberg reported that Blackstone is preparing to spin off its Invitation Homes unit through an IPO transaction.
The IPO is said to be planned for 2017. This has yet to be confirmed by the company. But if the report turns out to be true, shares of Blackstone could get a major lift from this deal.
Invitation Homes Represents Tremendous “Locked Up” Profits
Invitation Homes was created as a result of Blackstone’s buying spree of distressed homes during the financial crisis.
When the residential real estate market tanked, Blackstone used its access to capital to buy foreclosed homes from banks and other mortgage companies. Many of these homes were bought at pennies on the dollar. That’s because banks were desperately trying to unload these homes and get them off their balance sheets.
Today, the U.S. residential real estate market is in much better shape. According to the Wall Street Journal, existing home sales just had the two strongest months since the recession. Low interest rates have helped to drive demand for homes higher.
Meanwhile, rental rates have been moving consistently higher.
(Source: Federal Reserve Economic Data)
Invitation Homes rents its properties to tenants. Higher rental rates naturally lead to higher profits for the company. More importantly, higher rental rates — alongside higher property prices — should boost the sale price Blackstone can get for Invitation Homes.
As a private equity company, Blackstone’s business model is based on investing capital for its clients. When Blackstone sells investments and realizes a profit, Blackstone is entitled to a portion of profits. These performance fees — or incentive allocations — lead to higher distributions paid to BX shareholders.
If Blackstone is able to sell Invitation Homes at a premium price, it could boost shareholder confidence and serve as a catalyst to send BX shares higher.
Why Now Is The Right Time to Sell Invitation Homes
Blackstone has an uncanny ability to buy and sell its investments at just the right time.
During the financial crisis, investors were worried that Blackstone was making a big mistake. Shares of BX dropped below $4 during the first quarter of 2009. This as Blackstone was aggressively buying foreclosed homes at pennies on the dollar.
Fast forward to today, and these homes are trading at a premium. Shares of other companies who own portfolios of homes for rent are also trading higher.
That’s what makes this such a great time to tap into investor optimism. Blackstone may be selling Invitation Homes during a time when investors are bullish on the industry. So Blackstone should receive top dollar for this company, resulting in large performance fees.
For Private Equity Companies, Perception Is Everything
A sale of Invitation homes could make a big difference when it comes to investor perception of Blackstone.
Right now, investors are relatively bearish on the private equity industry. The fear is that turbulence in global markets will make it more difficult for private equity companies to sell their investments for a profit. Without these profitable transactions, Blackstone will be unable to generate lucrative performance fees.
It is clear that Blackstone has plenty of opportunities to invest its capital into attractive deals. Last month, we noted Blackstone’s hedge fund purchases as an example of the company putting more capital to work.
But there have been few recent instances where Blackstone (or other private equity companies) have been able to sell large positions at sizable profits. The Invitation Homes transaction could reverse this trend and be a catalyst for shares of Blackstone to trade higher.
I’ve recommended BX as a great income opportunity for some time now. Shares are currently trading near $25. This is well below the $40 range where BX was trading just a year ago.
If the Invitation Homes transaction goes through, this may be your last opportunity to buy shares at such a discount.